American Banker sat down for an extensive exit interview with FDIC Chairman Sheila Bair, who will leave office on July 8. Following is an edited transcript.
AMERICAN BANKER: What is your plan for your first Monday out of office?
SHEILA BAIR: Probably having a leisurely breakfast and finishing the crossword and taking the dogs for a long walk. Then I'll come back and work on my book for a couple of hours and do something with the kids in the afternoon probably. It will be a nice relaxing day.
Q: What about the first Friday after you step down? Will you check in to learn how many bank failures there are?
A: I thought maybe I should just stop reading the newspaper for a few months. I will be always interested in what happens at this agency. That will always be the case, whether it's bank failures or whatever is happening.
Q: Some have speculated you may be interested in political office. Any truth to that?
A: Government service? Sure. I could see coming back someday in an appointed position. But I don't see myself running for office. In the near term, I really just want to write the book. I'll be joining a foundation in the fall and doing work on nonfinancial boards and a little public speaking and that's pretty much what will keep me busy for the next year or so.
Q: Have any jobs offers come your way yet?
A: There are a lot of things that have popped up. I can't really talk seriously [about] them until I leave anyway. Eventually, I might want to transition to more of an executive position, but for now I just would like to get the book done and decompress a little bit and then we'll see what happens after that. Everyone says to take your time in terms of what your next move is. Frequently, a lot of the opportunities that are out there don't surface until you're out of office for some period of time. That's appropriate.
Q: You've talked about being interested in the nonprofit world. What intrigues you about that?
A: I'm attracted to public-purpose goals, I guess, and I think the government obviously has public policy objectives. A lot of nonprofit work does as well. Academia has attracted me too, just because I like young people. I like to make sure young people get good educations and also an academic and cultural environment that instills good values, good leadership values — if it's a business school, good ethical values. There is a lot of good that can be accomplished in the academic world as well. I like running things. I do. I do like running things. We'll see: a university or a foundation of some sort, eventually, might be a very attractive thing. Or going back into the government too could be attractive as well.
Q: What is your proudest achievement as FDIC chairman?
A: Definitely my proudest achievement is the way we rallied very quickly operationally and handled these bank failures in a way that was really smooth and made sure people had uninterrupted access to their insured deposits. It was touch and go there for a while in the late summer of 2008. But we'd already prepared for and launched a public information campaign in conjunction with our anniversary. … We did our core mission, but we did it very well under very challenging circumstances. Sometimes I think we made it look too easy because I don't think the agency gets as much credit as it should. It was really a lot of work behind the scenes. A lot of stress, a lot of long hours by the staff. It was really phenomenal the way they really quickly put the infrastructure together to handle this very large volume of bank failures.
Q: Was there a low during your term?
A: When I first got here, I was a little taken aback [by poor morale among FDIC personnel.] There were tensions with the union and there were tensions with the IG. There was just a lot of unhappiness. That wasn't anybody's fault. That was just kind of symptomatic of the downsizing that had to occur. It was obviously a very difficult process for the agency. … The environment — and this wasn't unique to the FDIC — was that regulation had come out of favor. It wasn't necessarily viewed as a good thing to be a regulator, and with so few bank failures people had kind of forgotten about how important we are, or at least we weren't front and center in terms of relevance in the public eye. It was tough at first. I saw these morale issues. … That was really a first priority for me. I don't think there's ever been a low at the agency, but I was a little taken aback when I first came. But we really got on that. … We created a culture-change initiative and a culture-change council and I think we really turned it around. Those employees needed to feel better about themselves and their jobs as we got into the crisis. They did. Morale was improving and they were energized and ready to tackle it. Now everybody is still really exhausted, but morale is still high here and I feel good about that.
Q: Was there a decision over the past five years that you regret?
A: I saw that people were scared and I did not want people to be scared. IndyMac was the biggest failure up to that point. It was accelerated because of liquidity problems. And it was a West Coast failure. And so the decision was made that the OTS was going to close IndyMac a few hours before the regular closing time. There were legitimate reasons for doing that, with communications, because it was so much later here, they were concerned about getting information out to members of Congress and others about what was going on. That all sounded reasonable.
[But] people are still going to come to the bank thinking they can do their business, and since it's a Friday, they have their paychecks, and it's going to be closed. We went ahead and closed it a few hours early, and never again because I still remember seeing people did come after the closing and they were banging on the door and CNN was filming it and that loop all weekend, I was just really troubled by that. And so the orders went out: No other closing occurred before normal business hours.
That was important, even though that made it harder and a little more expensive for us. That was okay because I didn't want people coming to the bank expecting it to be open and it being closed. … Those bank accounts, they need continual access to that money. It's not like with insurance proceeds where you expect to wait a couple months to get it out. They need to know that bank is there for them and their money is there and can be accessed when they need it.
That is the one mistake, I think, we made that I regret. Also, IndyMac had very small branch offices and there were a lot of uninsured at IndyMac and unfortunately we had to impose some losses on them. We got smart later, but initially we didn't set up off-site facilities for the claimants to come and file the claims with us. They were in the branches, and it was hot, and they were lined up.
Q: Was there an occasion during the crisis and stabilization effort when you wish you had advocated for a different decision than that which was made?
A: This whole crisis — all the bailouts — what it really was all about was bondholders, let's face it. It was about whether bondholders were going to take some losses or not. Our process is: bondholders take losses. They're unsecured and that's where they are in the priority scheme and we don't have an insurance program for bondholders. We have an insurance program for deposits. … I do looking back on this wonder if perhaps some measure of loss should have been imposed on some of these bondholders, or counterparties in the AIG situation.
I get that the system was interconnected and we couldn't have this domino effect where one institution goes down and imposes losses on others. But why not a 10% haircut, I mean, something? … I do wonder if that was more generous than it needed to be.
Of course, hindsight is always 20-20. And I'm second-guessing myself as much as anyone else. But I do think in retrospect perhaps we erred on the side of being more generous, not less generous, because if you didn't provide enough support the risk could have been so significant. That's why it's so important going forward that we have this new resolution authority so we don't get in a situation at least for the badly managed institutions … that there is a process other than bailout that the government has.
Bailing out poorly managed banks just hurts everybody. It outrages people. It taints the well-managed banks. Look at the reputation of the banking industry now. Everybody looks like their culpable. There was differentiation.
Q: Considering how calm the first year of your term was by comparison, did the onset of the crisis take you by surprise at all?
A: The kind of stuff that we thought of as abusive [before the crisis] like steep payment resets and negative amortization and the prepayment penalties and all that — they had kind of gone mainstream. When I looked and saw this database, I just couldn't believe it. That did surprise me, how this had become more standard practice. We were prepared for the worst on the mortgages. But what also surprised me was the collateral damage of the CDOs and the structured deals and the synthetic derivatives — trillions of exposure based on hundreds of billions of mortgages going bad. That really magnified the loss.
I had never heard of a SIV until August 2007 when we started hearing about SIVs. 'Ok, what's that?' They were just floating out there in the ether. Nobody was holding capital against them. They were just out there. Of course, the whole model was based on the bank backing them. … That was surprising because up to that point I had kind of still thought of this as more in the shadow banking sector and it wouldn't be so closely associated with risk to the large insured banks. As bad as I knew subprime and the nontraditional mortgages were, I never thought it would have led to this global, on-the-brink crisis that we experienced in the fall and early winter of 2008.
Q: The biggest failure of all time. Big-bank bailouts. Industry-wide debt guarantee. Huge legislative push. When you took the job as FDIC chairman, did you have any idea it could be this eventful?
A: I really didn't. When I first started, I thought it was going to be about Wal-Mart … and implementing our new deposit insurance rules. I joke that I need to stay out of government, because every time I get induced back. … When I was going to Treasury, we had just adopted our daughter from China, and I didn't want a demanding job. The Bush people said it would be 9 to 5. Things like privacy and whether banks should get into real estate. … Then 9/11 hit and Enron hit and it was just a 24/7 job again. This was the kind of same thing. They said, 'This will be 9 to 5,' and it wasn't.
It was the golden age of banking. I said that at my first or second QBP press conference: 'This is the golden age of banking.'
Q: Is the Basel committee's 2.5% capital surcharge on systemically important financial institutions high enough?
A: I think it is enough. It's not optimal. We would have liked something higher. But I think it is enough to have a very meaningful impact on financial stability and reducing the risk of large institution failures. You can't eliminate it, but I think it is going to reduce it. I also think it's going to have a collateral benefit. This is going to make it a bit more expensive to fund yourself if you're a big bank, which is good since they have this huge funding advantage already. It might even perhaps provide some incentives to get smaller.
Q: Will Basel always be evolving?
A: Probably. The focus is now on the big variations in risk weights in European banks, because they did implement Basel II and they're lower. They keep going down. There is an effort in Basel to try to see if we can put some parameters around them, maybe do a peer review to try to figure out who the outliers are."
My personal view is the Basel II advanced approach was flawed from the beginning. … It was just a flawed model. We keep struggling with it, trying to fix it when it's just inherently flawed. I wish they would just do in Europe what we'll probably end up doing in the U.S., which is keeping Basel I or have a more nuanced, bucketed approach, but still have some floors for each asset category. With the leverage ratio too, that will help constrain some of the problems with the advanced approaches. It really is just flawed, and I think a lot of this nonstop work is trying to fix something that I don't think is really fixable. … The Basel III standard — that's pretty clean. We did a good job cleaning up the definition of common equity. I hope we don't start dirtying it up again with convertible capital and things like that.
Q: Should the 7% common equity ratio for large banks subject to Basel III be applied to small banks as well?
A: I don't think that's really been decided yet. I think whether you do or not it probably wouldn't have much impact on small banks because they can fail and their capital is a couple hundred basis points higher now than the larger institutions. Virtually almost all of them are above a 7% tangible common equity ratio already. Either way, I don't know how much of an impact it would have on them.
Q: If the Orderly Liquidation Authority mandated by Dodd-Frank had been in place, how many institutions would have been recommended for an FDIC receivership?
A: Especially with Bear Stearns and Lehman, there's a good chance they would have been resolved without government intervention. They would have been sold on their own. Lehman had a couple opportunities early on in the process to sell itself, but they thought the price was too low.
There probably would have been four or five either run through resolution or that righted themselves. … If they went through our process, they were going to lose their jobs, the boards were going to lose their jobs, their shareholders would be wiped out, a lot of bad things would happen. It would have been a powerful incentive.
Q: You have talked about the need for political will in implementing Dodd-Frank. In a future crisis, do you think political will be there to prevent stakeholders from seeking another bailout from Congress?
A: Even if you think it's okay to bail out big banks, which I don't, let's just look at the damage this has caused, to the reputation of the banking industry, to the reputation of regulators, to the reputation of government. People are angry and they have a right to be. This has created a lot of cynicism and disaffection.
It's not just here. Look at what's going on in Greece right now. At the end of the day, one of the reasons they're rioting is because they think a lot of big-bank bondholders are not being asked to absorb any of the losses. In a capitalist society, this is not what you do. … I would worry about our society if within the memory of this generation that we did bailouts again. That shouldn't even be on the table. People should be trying to avoid that like the plague.
Q: There is a perception that you are out in front on a lot of things. Do you agree with that perception, and why is it there?
A: There have been a number of occasions especially in the crisis where I went public only after a lot of internal discussions and just getting nowhere. … It's not so much sitting down and having a discussion and people saying 'No.' There was not even acknowledgement.
So there were times where I felt that to get people's attention we needed to be public, and I think it had some effect. I think we got farther with a lot of these initiatives than we otherwise would have if we had just meekly gone away and not pestered anybody. I don't regret it. I know it is not traditional for banking regulators to debate policies publicly.
We always try to have conversations first. But I also think it's not necessarily bad to discuss these publicly. There's some sense that the regulatory process should be closed and opaque and secretive and if we have disagreements we need to hide them and we shouldn't let people know what we're really thinking. I don't buy any of that… It's important to engage with the public and engage on policy issues."
Q: Are you disappointed that despite your energy in calling for loan modifications, they never really took off?
A: We should have gotten started a lot earlier. There should have been a lot better execution with the servicers. With the loan mods, the problem was always the happy-talk phenomenon. People wanted to say they were going to do it, … but when it comes to operationally putting in the resources and staffing that you needed for systematic loan modifications, it just wasn't there. This doesn't excuse it, but part of it is the economics of servicing — the whole model is based on performing loans. … Nobody wanted to throw more money at it. … Ironically, with the foreclosure process breaking down, maybe that will push more mods.
Q: Do you think there will be wider acceptance of there being a linkage between safety and soundness regulation, and consumer-protection regulation?
A: I hope so. These consumer abuses in mortgages are costing a lot of money, aren't they? Isn't that what caused the crisis? I guess you could say some of the borrowers were complicit. But it takes two to make a loan, and these big institutions should have known better. That's just a really good example of why safety and soundness and consumer protection are two sides of the same coin.
It's absolutely related. … Financial products need to be something that are mutually beneficial.
It saddens me that so many community banks have really just gotten out of consumer lending. They do commercial [lending], and they're good at that. I do think some of the consumer compliance costs have been a factor in that and I'm hoping the consumer agency, I think they do want to simplify these rules. That's important because consumers need to understand what their legal rights are, but I think it will help the community banks get back into this business if they don't have to hire a team of lawyers to understand a 500-page rule and they've got something they can understand … and know how to comply with.
Q: Generally, how do you rate relations between the FDIC and the industry?
A: There is mutual respect. I think they appreciate some of the things I've done. I think they've disagreed with some of the things I've done. That's the way it should be. We have an independent role, we have an independent function. It's not our job to be their advocate or their cheerleader. It's our job to supervise them and to make sure they comply with the rules. They have our name on their doors and their teller windows, and our reputation is somewhat tied to their reputation. There is a commonality of interest there. But that means that they need to operate their institutions in a prudent manner and in a way that they treat their customers right. The vast majority of them do try to do that.
Q: You gave a speech to the American Bankers Association in March. There were some tense moments where the audience reacted negatively to your remarks. Has that been addressed at all in subsequent contact with the trade group?
A: That was a very curious thing. I've spoken with the ABA I don't know how many times. When I was at Treasury, I spoke to them. I've never had a reception like that. I still to this day don't understand what happened. I did have a somewhat direct message with them. What I was trying to say to them was to support responsible, effective regulation. Because the whole industry is tainted by the bad players. The ABA has initiated this image project, right? You need to improve your image by working with your regulators and supporting effective measures to try to make sure everybody in the industry does the appropriate thing with their insured deposits. That was the message I was trying to convey. I must say I almost felt like there had been an effort to stir them up on overdraft protection. That really seemed to be what was leading it. … I'm still to this day kind of mystified by that.
Q: What will be the most surprising thing we learn in your book that we didn't know before?
A: It will be my memoirs. There will be personal anecdotes and things people don't know about. It's not like a tell-all. I'm a constructive, positive person. I don't assign bad motives to people. But there will be things that happened here, interacting with other regulators, interacting with industry people, and some of the insights I picked up on the way. It won't just be about the crisis.
Part of it will be the effort on Dodd-Frank, the ups and downs of that, and the implementing and all the pushback on that, and the short-term memories with some folks. I'll try to also make sure that there's accurate information about some of these issues. That's one of the reasons I gave the speech on short-termism, because so much of this debate is driven by 30-second sound bytes. It's important, I think, especially for the media to make sure that these issues are aired in a way that is accurate and balanced.
Another reason why more regulators probably should speak is because we start losing the debate. If we're raising capital and we've got lots of big institutions and their consultants and others out there saying we're screwing up economic recovery because we're raising capital. We haven't even raised capital yet and we won't for a couple of years. But if we don't speak out and address that people are going to start believing it.
If you hear it 20 times you're going to start believing it. You do need to speak up and articulate what we're doing, why we're doing it, explain it to the public and let them decide, but at least make sure our viewpoint is out there. The culture especially for bank regulators is not to speak out. But I think on these policy issues it's important for the general public to understand why they're important.
Q: What will you miss most about your job?
A: I'll miss everybody here: my board, my staff, all the staff. I've just really enjoyed working here and all the great people and dedicated people that we have here.
Q: And least?
A: Probably the interagency infighting on these rulemakings. I just wish we could get beyond it sometimes. We usually end up resolving our differences, but, boy, sometimes it takes a long time to get there. I wish we could make that process work a little better.